Oracle not budging on maintenance fees

Analysts and consultants say the vendor is making some contract concessions to customers, but not on its support fees.

Chris Kanaracus, IDG News Service
April 14, 2009

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It has become a regular ritual during Oracle's quarterly earnings conference calls. Company executives point to the vendor's lucrative revenue stream from maintenance - paid annually by customers as a percentage of their license fees - and bask in the approving glow of the financial analysts on the line.

Maintenance revenue is particularly crucial to software vendors during a recession, when many customers are holding back on buying new licenses.

Oracle reported US$2.9 billion in revenue for "software license update and product support" in its third quarter and incurred just $256 million in expenses against that total, for a roughly 90 percent profit margin. In contrast, the vendor logged about $1.5 billion in new license sales in the quarter, which it reported last month.

It's no surprise, then, that Oracle isn't budging an inch on maintenance fees as it works to finalize new contracts by the end of its fiscal year on May 31, say analysts and consultants.

"People have gotten different concessions initiated by maintenance or around maintenance, but I wouldn't say they're getting discounts on maintenance," said Forrester Research analyst Ray Wang.

For example, a customer's contract may include a clause that allows for the customer's maintenance bill to be adjusted each year according to the Consumer Price Index, a key measure of inflation.

Some users are managing to get Oracle to relent on this, said Eliot Arlo Colon, president of Miro Consulting, a Fords, New Jersey, company that advises Oracle customers on contact negotiations.

Wang echoed Colon. "I've seen this happen recently with a lot of deals, including Oracle," he said.

This particular concession may be more possible now because the CPI has been anaemic so far this year.

Miro clients are also letting maintenance lapse on less mission-critical applications, according to Colon.

Meanwhile, Oracle's willingness to discount new licenses has been "roughly the same" as last year, Wang said.

Instead, the company is trying to give customers more bonus items, he said: "They're assisting you with installation, adding training, adding other products and tools that can help the application succeed."

These non-discount areas can actually be more valuable to a client than a price discount, according to Wang.

But for some users, such as those who "need a lot of hand-holding" or are rapidly expanding their use of the software, maintenance fees may well be justified, Wang said.

Oracle also spends billions each year on research and development, reinvesting with help from maintenance revenue, Wang added.

Indeed, some Oracle customers say they aren't troubled by the vendor's fees.

Zebra Technologies has adopted Oracle widely, moving away from a previous strategy that employed a lot of custom development and a legacy ERP (enterprise resource planning) system.

The Lincolnshire, Illinois, printing and labelling company now has an enterprise-wide licence agreement with Oracle, and has hired "key people" to work in-house instead of paying outside consultants, said Jeffrey Hand, director of IT.

As a result, from an integration standpoint, Zebra is saving about 60 percent over the old model, he said: "We're getting out of the software business."

Wind River Systems, which sells products and services for optimizing device software, is planning to buy Oracle BI (business intelligence) software to run against its financials application, said vice president and CIO Scott Fenton.

While he has "been very successful" at garnering significant license discounts from the vendor, Fenton takes the cost of maintenance in stride.

"Paying maintenance is like getting a tune-up on your car," he said. "Oracle is top-notch. It's best-in-class support. It's a valuable service and part of doing business."